U.S. Bears Down on Turkey's Gold Link to Iran

By

Joe Parkinson and

Jay Solomon

Updated Nov. 30, 2012 3:46 p.m. ET

ISTANBUL—Washington and Ankara are on a collision course over Turkey's surging sales of gold to Iran, as the U.S. Congress and Treasury focus on cutting off a trade they believe is emerging as one of Tehran's primary conduits to export natural gas and evade Western sanctions.

The Senate on Friday approved a measure that would tighten sanctions against Iran, targeting suppliers of materials that could be used to build ships and taking further aim at the country's port and energy businesses. Among other provisions, the new legislation would ban the transfer of precious metals to Iran, including gold. The sanctions are expected to be approved by the House quickly.

The Senate's move comes after President Barack Obama quietly empowered the Treasury over the summer to sanction any foreign individual or firm that helps Tehran acquire U.S. dollars or precious metals, according to U.S. officials.

"At the end of July, the president issued an order that authorizes Treasury to impose sanctions on anyone who helps the government of Iran acquire U.S. dollars or precious metals, including gold," said John Sullivan, a Treasury spokesman. "We can't comment on any investigations that may be ongoing."

The president has the authority to issue executive orders on a wide range of activities. If the Treasury finds a company or individual working to help Iran get gold, it could sanction them immediately.

Data released Friday showed that Turkey's gold exports remained high in October, indicating Ankara still uses the commodity to pay for Iranian gas and circumvent sanctions.

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According to data released by the Turkish statistics agency, Turkey's gold exports rose 14-fold on the year to $1.2 billion in October, versus in $1.3 billion in September. The expansion took this year's total gold exports to a record $12 billion; a tenfold rise on the $1.2 billion increase in 2011.

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Turkey last week acknowledged that the rapid rise of gold exports was related to payments for imports of Iranian gas, spotlighting the most striking example of how Iran is using creative ways to sidestep Western sanctions over its disputed nuclear program, which have largely frozen it out of the global banking system.

The Senate bill tightening sanctions was passed 94-0 Friday, with six senators abstaining, as an amendment offered by Sen. Bob Menendez (D., N.J.) to the National Defense Authorization Act.

The Obama administration expressed concerns about the provisions but didn't explicitly threaten a veto over the sanctions language. Officials said the "comprehensive and unrelenting" sanctions implemented by the administration have been effective and that new measures "threaten to undercut these efforts."

The prospect of tighter sanctions on the gold trade could raise tensions between Washington and Ankara at a time of instability in the region, and take the shine off a trade which has flattered Turkey's economic performance this year, helping to speed a trade rebalancing which has boosted investor confidence and spurred investment, analysts said.

"The Turkish gold deal is providing Iran a lifeline and the U.S. now seems more eager to stop it," said Atilla Yesilada of Istanbul-based research consultancy Global Source Partners. "This trade definitely flatters our economic figures so we look better for investors, but it doesn't make Turks richer or create jobs," he said.

Turkey's relationship with the U.S. is under increased pressure: Ankara has asked the North Atlantic Treaty Organization to station Patriot missiles to defend its border with Syria after becoming increasingly frustrated by Washington's refusal to take a more hawkish line on the conflict. Prime Minister Recep Tayyip Erdogan in November strongly backed Hamas and labeled U.S.-ally Israel a "terrorist state" during the Gaza conflict.

Analysts say the U.S. has thus far been prepared to give a degree of flexibility to Ankara, which has become an increasingly important ally in the Middle East as the Arab uprisings have recalibrated the region's political geography and sent Washington scrambling to project its influence through regional partners.

Turkish policy makers have this week struck both defiant and conciliatory tones over gold exports to Iran. Economy minister Zafer Caglayan on Wednesday said Turkey would continue to export gold irrespective of U.S. action. Energy Minister Taner Yildiz on Thursday emphasized that Turkey and the U.S. were discussing the issue and he envisioned there would be "no conflict."

Turkey began to export large quantities of gold directly to Iran in March, the month Tehran was cut off from the Swift global payments network, effectively blocking the country from performing international financial transactions. Analysts said that although the trade with Iran wasn't illegal, Ankara wanted to keep details out of the public eye for fear of raising the ire of Washington, which is leading the international push against Tehran for its alleged plan to develop nuclear weapons. Iran says its program is for peaceful purposes, including medical treatments.

Iran provides 18% of Turkey's natural gas and 51% of its oil. Since U.S. and European Union sanctions bar Tehran from receiving payments in dollars or euros, Ankara pays Iran for the gas in Turkish liras. The lira is of limited value for buying goods on international markets, but ideal for purchasing Turkish gold. The government hasn't specified how it pays for Iranian oil.

Tehran has sought alternative means of payment for energy exports—its main foreign-currency earner and economic lifeblood—including Chinese renminbi and Indian rupees, as well as gold, in an attempt to skirt international sanctions and pay for its soaring food costs.

Friday's data showed how the gold trade has become more diversified in recent months. Although direct gold exports to Iran declined to just over $13 million in October from about $18 million in September—and more than $1 billion a month in the summer—nearly $500 million in gold was sent to Dubai, continuing a trend that began in August. Gold traders and economists say much or all of this gold was bound for Iran. For the first time, the data suggested trade could also be being routed through Switzerland, which isn't a signatory to European Union-wide sanctions banning gold trading with Iran, traders and economists said. Turkish exports of gold to Switzerland rose to a record $460 million in October, marking a fourfold rise.

The gold-exports deal has offered a significant fillip for Turkey, helping Ankara to reduce its current account deficit—considered the weak point of the emerging economy. Moderating growth and tighter monetary policy have provided the prime drivers for a rebalancing which was rewarded in October as Turkey secured its first investment-grade credit rating for more than two decades. But economists stress that Turkey's gold trade has also helped, narrowing the current account deficit by 7%, or around $4 billion of the total $56 billion finance gap.

"Turkey has successfully navigated a soft landing, but market perceptions have been affected positively by the gold trade," said Nilufer Sezgin, chief Turkey economist at Erste Securities in Istanbul. "If gold exports suddenly stop or fall to lower numbers I would expect the current account deficit to increase towards the end of the year," she said.

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